U.S. movie theater shares may lose steam despite blockbusters

[April 30, 2015]  By Ryan Vlastelica

NEW YORK (Reuters) - U.S. movie theater stocks are unlikely to continue their blistering run despite a wave of popular first-quarter titles and the expected success of "The Avengers" sequel and "Star Wars" in the coming months. Shares of major names such as AMC Entertainment Holdings, Carmike Cinemas and Cinemark Holdings are all sharply outpacing the broader U.S. stock market. But that success may signal limited room for the shares to rise further, even if company results come in ahead of expectations.

"No one anticipated the box office would do so well in the first quarter, but by now the good news has been priced in," said David Miller, managing director at Topeka Capital Markets in Los Angeles. "It's hard to see further upside from here."

Studios typically do not release major films in the first quarter, but runaway successes such as "American Sniper" and "Fifty Shades of Grey" coaxed back audiences after a disappointing 2014, which featured the weakest summer box office since 1997, according to box office data company Rentrak.

The total U.S. box office gross in the first quarter rose 2.85 percent from the previous year to reach $2.47 billion, according to Rentrak.

Despite oft-voiced concerns that video streaming services like Netflix could lure consumers from theaters, that impact has yet to manifest itself, analysts said. The 2014 slowdown was attributed to a weak slate of films.

AMC, scheduled to report after the market closes on Wednesday, is expected to post first-quarter earnings growth of 37.2 percent and revenue growth of 5.4 percent, according to Thomson Reuters data. Those expectations have contributed to the stock rising 23.7 percent year-to-date, well above the S&P's 2.7 percent rise.

AMC has a price-to-earnings ratio of 25.82, which exceeds the 18.67 ratio of its entertainment industry peers. StarMine's measurement of intrinsic value - which looks at anticipated growth over the next decade - calculates that AMC should trade at $25.42, 21.6 percent below its Tuesday closing price.

Carmike Cinemas and Cinemark Holdings, which will report in early May, are seen posting strong revenue growth for the quarter. But the shares of both are up more than 20 percent in 2015, giving them elevated P/E ratios.

Carmike, which Reuters in March reported was exploring a potential sale, would need to fall 45 percent to trade at what StarMine estimates is its intrinsic valuation.

Regal Entertainment Group, which in October also said it was considering strategic options, has a market capitalization and quarterly sales roughly similar to AMC, but unlike its peers, it is expected to see sales and earnings fall in the first quarter.

Analysts credit that divergence to AMC renovating theaters with elements like reclining chairs, which has lifted market share. Regal did not return requests for a comment.

Despite that, Regal's P/E ratio is a lower-than-average 18.32 and it is less than 10 percent above what StarMine estimates should be its intrinsic valuation, having risen a more modest 4.4 percent in 2015.

Tuna Amobi, media and entertainment equity analyst at S&P Capital IQ in New York, said he expects the first quarter for Regal was "challenging," but that "creates the potential for it to surprise on the upside."

Still, Amobi expects Regal to report full-year revenue growth of 6 percent. "That rebound should show up in the latter quarters of this year," he said.

While valuations may be stretched, analysts do not see long-term risks to the theater model despite Netflix moving into original film programming.

"That isn't going to keep people from seeing 'Star Wars,'" said Michael Pachter, research analyst at Wedbush Securities in Los Angeles.

(Reporting by Ryan Vlastelica; Editing by Linda Stern and Alan Crosby)

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